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Be it pandemics, storms, wars or pay disputes, airline managers are rarely without worry. In Europe, they have another to add to the list: lowly valuations.
Lufthansa’s outgoing finance director Remco Steenbergen last week lamented the legacy carrier’s “very cheap share price”. Lufthansa’s €8.1bn market capitalisation is below the value of its equity, he complained, something he found “personally very, very disappointing” as he prepares to exit this month.
Share prices are never as strong as executives want them to be. But when it comes to airline valuations, the question is legitimate. Across the European sector, most airlines are trading at a discount to historic multiples.
Flag carriers are particularly unappreciated, points out Bernstein analyst Alex Irving. On a forward price/earnings ratio Lufthansa, at 4.8 times, trails its pre-pandemic five-year average by about 30 per cent, as does British Airways owner International Airlines Group on 4.5 times on S&P Capital IQ data. Ryanair and easyJet trade on high single-digit multiples.
The first quarter is traditionally a weak period for legacy airlines. Most make losses which are then recovered during peak summer trading. Even so, their share price performance this year compares poorly with the budget carriers.
These lowly valuations look odd. Problems with aircraft deliveries and parts such as seats this year will continue to constrain capacity in Europe — a market that has generally been oversupplied.
As long as demand remains resilient, this should support higher ticket prices. Since the pandemic, balance sheets have strengthened, earnings have largely recovered and many legacy carriers are at or near investment grade, says Davy’s Stephen Furlong.
Yet suspicions endure around the sustainability of the legacy carrier model, with their higher cost bases and complex structures. Pandemic-era capital raises did not help. Corporate travel has not fully recovered. More consolidation is required but there is uncertainty over the extent to which competition authorities will let that happen.
Company-specific issues exacerbate this. Lufthansa’s first-quarter operating loss of €849mn, a deterioration from €273mn the prior year, included a €350mn hit from strike action. Air France-KLM’s worse than expected first-quarter operating loss of €489mn included a €50mn salary payment at KLM as well as €50mn on disruption costs.
In periods of geopolitical and macroeconomic uncertainty, investors shun airlines. But the gloom is still overdone. Shares in IAG — which is this week forecast to post its second first-quarter operating profit since 2019 — are outperforming even those of budget rivals year-to-date as it invests in improving BA’s tarnished reputation.
Other legacy carriers, though, will have to demonstrate a longer period of trouble-free cruising before investors check back in.